Lloyds (LSE: LLOY), I think it is fair to say, had a good run in 2024. The share price is now 35% higher than it was just one year ago, with a 5% dividend yield to boot.
Yet the Black Horse bank trades on a price-to-earnings (P/E) ratio of 8. That may make it look cheap, but I see a number of risks I fear could bring the Lloyds share price crashing down this year – and put me off investing in it.
Weak uncertain economic outlook could be bad news for banks
First is the obvious one. The economy. For now, it may not exactly be humming, but it is at least moving along without spluttering too much.
Should you invest £1,000 in Lloyds Banking Group right now?
When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Lloyds Banking Group made the list?
I reckon that could change, though. There is a high level of geopolitical uncertainty that I fear could hurt both corporate investment and consumer spending, both factors that could lead to a weaker economy. That matters – lots – for Lloyds as it is the nation’s leading mortgage lender.
While I see that as a strength if the economy does well, the reverse is true too. If mortgage defaults go up, profits could fall dramatically We’ve been there before – and we could get there again.
The first nine months of last year saw post-tax profits decline 12% year-on-year.
Car finance scandal could hurt profits
Somewhere else we’ve been before is British banks having to pay out billions of pounds in compensation for mis-selling payment protection insurance (PPI).
Seemingly, they did not learn the lesson fully and another consumer mis-selling scandal has arisen, this time in the car finance field. The impact of this could be huge for the likes of car dealerships struggling to arrange finance under an environment of tighter scrutiny.
But the banks will not get off scot-free. Last year, Lloyds set aside hundreds of millions of pounds for fines and compensation payments. It also scrapped commissions in its large car finance arm, which could have long-term implications for the profitability of that business.
As with PPI though, we do not yet know how much fines and compensation may finally add up to once the dust settles on all historical claims.
Here’s why I’m not investing
Still, even after setting aside that money last year, Lloyds managed to make huge (albeit reduced) profits in the first nine months, as I mentioned above.
It has deep strengths including well-known brands, a vast customer base and a proven business model. The 35% rise in the past year could indicate that many investors have scented a potential bargain.
But is the Lloyds share price as cheap as it looks? That low P/E ratio could change at a stroke if earnings fell badly – a scenario I think could happen if either of the above risks comes to pass.
In the current economic environment, I am not investing in any bank shares – and that includes Lloyds, for sure.
